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The Department of Labor (DOL) should issue clarifying guidance on the proper treatment of distributed contracts and custodial accounts in the context of a 403(b) plan termination, the NTSA Government Affairs Committee recommended in a recent comment letter to the DOL’s Employee Benefit Security Administration.

The letter says that while the IRS has expressed a position on this issue, guidance from the DOL “is badly needed to resolve the issue with respect to plans that are subject to Title I of ERISA … In a voluntary private retirement system, as we have here in the United States, the ability to formally terminate a retirement plan, whether a 403(b) plan or otherwise, is inherently a right of plan sponsors. Employers have many valid reasons for both initiating and terminating a plan,” according to the NTSA letter.

The letter argues that the DOL should definitively clarify that current regulations allow for this result. Specifically, it says, the DOL should make it clear that a distribution upon termination of a 403(b) annuity contract (or related certificate) or 403(b) custodial account would cause the holder to have received a full distribution of his or her interest in the plan.

Furthermore, the letter recommends that the guidance should specifically indicate that “the individual would no longer be considered a participant in an employee pension plan and upon distribution of all such contracts, certificates or custodial accounts (or, where applicable, cash), the plan would be considered terminated and no longer be subject to ERISA.”

The National Tax-Deferred Savings Association is a non-profit professional society.
The materials contained herein are intended for instruction only and are not a substitute for professional advice. Copyright 2019 by NTSA.